• US and UK on stagflation watch.

• Norges Bank set to keep policy steady.

• RBA widely expected to resume easing.

The Summer of Stagflation

USD traded on the defensive most of the week weighed down by narrowing US-G6 interest rate differentials and a US economy teetering on the edge of stagflation. These headwinds are likely to keep USD under downside pressure in the week ahead, with US CPI inflation expected to quicken (Tuesday) and retail sales (Friday) facing downside risk in July.

US Headline CPI is seen at 2.8% y/y vs. 2.7% in June and core is expected at 3.0% y/y vs. 2.9% in June. The Cleveland Fed’s Nowcast model forecasts headline and core at 2.7% y/y and 3.0% y/y, respectively. The rising ISM prices index points to upside risk to inflation.

Meanwhile, consensus pencil-in US headline retail sales at 0.5% m/m vs. 0.6% in June and the retail sales control group at 0.3% m/m vs. 0.5% in June. However, the Chicago Fed Advance Retail Trade Summary (CARTS) points to a contraction in retail sales activity. The CARTS release for July retail & food services sales ex. auto show declines of -0.1% m/m in nominal terms and -0.3% m/m when adjusted for inflation.

The US June Treasury International Capital (TIC) data will also be of interest (Friday). The May TIC data showed that foreign investors piled back into US long-term securities (treasury bonds & notes, corporate bonds, equities, gov’t agency bonds). We doubt the momentum in foreign demand for US stocks and bonds can last. The Trump administration’s effort to narrow the US trade deficit means fewer dollars will flow overseas, reducing the need for those funds to be recycled back into US securities. This is a structural drag on USD.

UK Stagflation Watch: GDP and Jobs on Deck

GBP outperformed all major currencies this week after the Bank of England (BOE) delivered a hawkish cut. However, stagflation headwinds in the UK threaten renewed GBP weakness on the crosses.

The UK June jobs data is expected to show a further loosening in the labor market and upside risk to inflation (Tuesday). The unemployment rate is forecast at 4.7% vs. 4.7% in May while the vacancy-to-unemployment ratio is projected to fall further below the 0.54 level that Bank researchers consider to be consistent with a balanced labor market.

Meanwhile, total regular pay is expected at 5.0% y/y vs. 5.0% in May, and the BOE projects private sector regular pay to ease from 4.9% y/y in May to 4.6% by September and 3.7% by year-end. Nonetheless, the pace of wage growth is running hot relative to the BOE’s 2% inflation goal given labor productivity is estimated at 0% in 2025.

UK real GDP growth is projected to slow sharply in Q2 (Thursday). Temporary factors that pushed up real GDP in Q1 like the front-loading of exports and activity ahead of higher expected tariffs and domestic taxation, are set to unwind. Real GDP is seen at 0.1% q/q vs. 0.7% in Q1.

Norges Bank to Hold, but CPI Could Throw a Curveball

NOK will take its cue from Norway’s July CPI print (Monday), rather than the Norges Bank policy rate decision (Thursday). The Norges bank is widely expected to keep rates unchanged at 4.25% and reiterate that “the policy rate will be reduced further in the course of 2025.” No new economic projections will be released at this meeting. The next Monetary Policy Report is due in September.

The Norges Bank’s policy rate path implies one 25bps cut to 4.00% by year-end. The swaps market is more dovish and price in nearly 50bps of easing by year-end. Slower inflation in July risk validating swaps market rate cut pricing and undermine NOK. Headline CPI is expected at 3.0% y/y (Norges Bank forecast: 3.1%) vs. 3.0% in June while underlying CPI is expected at 3.0% y/y (Norges Bank forecast: 3.1%) vs. 3.1% in June.

Japan GDP: Another One Bites the Dust

JPY and JGB yields will likely ignore Japan’s Q2 real GDP report (Thursday). The economy is forecast to rise 0.1% q/q in Q2 vs. 0.0% in Q1. Growth is so far tracking below the Bank of Japan’s (BOJ) fiscal 2025 projection of 0.6%, strengthening expectations that the BOJ is unlikely to raise the policy rate beyond current market pricing - especially in the absence of clear acceleration in underlying inflation. This will act as a constraint on JPY appreciation.

The swaps market imply 65% odds of a 25bps rate hike by year-end and a total of 50bps of rate increases to 1.00% over the next two years. We expect USD/JPY to remain within a wide 142.00-150.00 range over the next few months.

Déjà Hold at the RBA?

Australia’s Q2 wage price index (Tuesday) and July labor force report (Wednesday) are due next week but will play second fiddle to the RBA policy rate decision/August Statement on Monetary Policy (Tuesday). At its last July 8 meeting, the RBA unexpectedly kept the cash rate at 3.85% when a cut was virtually fully priced-in by interest rate futures. The RBA noted that “it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.”

The RBA is poised to meet expectation this time around and deliver a 25bps cut to 3.60%. Inflation in Australia is making good progress towards the RBA’s 2-3% target range. In Q2, headline CPI fell 0.3pts to 2.1% y/y, the lowest since Q1 2021, and trimmed mean CPI dipped 0.2pts to 2.7%, the lowest since Q3 2021. The RBA will likely stick to its guidance for “a measured and gradual approach” to monetary policy easing given resilient global economic activity. As such, we anticipate limited downside risk to cash rate futures, keeping AUD/USD within a 0.6400-0.6600 range next week. Cash rate futures imply 75bps of easing in the next 12 months.